lecture 4 exchange rate determination国际金融课件.ppt

Chinese Finance Research Institute Figure 2-2-24 i SF SFs ie i2 h(i, i*+(se-s)+?, W) Equilibrium rate A rise in Fs Changes in the foreign bond supply (Figure 2-2-24) Changes in the foreign interest rate (Figure 2-2-25-1) Changes in the exchange rate Channel 1: A depreciation (an appreciation) will lead to an increase (a fall) in W and a rise (a fall) in the foreign bond demands via the wealth effect. Channel 2: A depreciation (an appreciation) lowers (raises) the return i*+(se-s)+?. See Figure 2-2-25-2. Channel 3: A depreciation (an appreciation) increases (lowers) the supply of the foreign bond. Portfolio Approach Figure 2-2-25-1 i SF SFs ie i2 h(i, i*+(se-s)+?, W) A rise in i* Figure 2-2-25-2 i SF SFs ie i2 A rise in s Depreciation also leads to an increase in SFs The foreign bond market equilibrium Conclusion: Holding everything else fixed, a home currency depreciation is also associated with a fall in the domestic interest rate through foreign bond markets. See Figure 2-2-26-2. IV.4 The General Equilibrium See Figures 2-2-26-2. Portfolio Approach i S MM Figure 2-2-26-1 Home Money Bond Markets Equilibria i BB Decrease in Ms Increase in Ms Increase in Bs Decrease in Bs S Figure 2-2-12-1 Changes in home money supply i1 Return 0 St1 M1/P Real money supply M2/P An increase in Ms St2 i2 i Return 0 St1 M1/P Real money supply Figure 2-2-12-2 Changes in foreign money supply An increase in Ms* St2 III.3 Do Expectations Really Matter? Since UIP holds in the short run, then, i-i*?(EtSt+1-St)/St?Etst+1-st In equilibrium, equation [*] holds, st= Zt+k(Etst+1-st) Where, Zt=(mt- mt*) -h(yt-yt*) Using recursive method, we can obtain an explicit solution for st. Sticky-price Monetary Approach i Return 0 St1 M1/P Real money supply Figure 2-2-13 Changes in expectations St2 Depreciation expectation The solution simply means that the present exchange rate is determined by both the present economic variables (Zt), and the expectations of the